Why some kids get more parental cash than their siblings

Rebecca Valenzuela7 Oct 2017, 7:23 a.m.

Parental perception of their children's success - or income status - plays a critical role.

???Parental generosity is both great and contentious. For a young person trying to navigate life and balancing work and family and all its challenges, it is great to have parents you can lean on in difficult times.

For a parent, it is also great to be able to help, and stay connected with the children that way. Parental generosity has, however, also caused persistent tension in many families - as parents end up giving more (financial) help to some children than others.

And even if this was not a problem among non-recipient children, parental generosity can cultivate a culture of dependency or entitlement, effectively causing more harm than good in the long term.

In the field of family economics, there is a well-known puzzle about parent-to-children transfers. Apparently, parents give very unequally while they are alive, but provide to have their estates divided equally after death. This begs the question, why?

To explain this, the economist in me is drawn to two key concepts which underlie parents' motive to give: altruism and exchange.

Altruism is the idea that we give out of our good caring hearts, without expecting any return. The exchange motive, on the other hand, is exactly what it says - we give or take in return for another.

Now, parents are typically altruistic and genuinely care about the wellbeing of their children. In adulthood, children rarely end up being of equal state - some end up better off than others.

Given that altruistic parents give on the basis of need, it follows that parents end up giving more to their poorer offsprings.

True to form, survey data from various studies is consistent in showing that highest probabilities of parental transfers occur during children's marriage break-down/divorce, loss of job, and loss of a home - all of which signal a sharp decline in incomes.

Parental perception of their children's success - or income status - thus plays a critical role in the unequal parental transfers while still living.

The implicit assumption here is that parents have a good deal of information about their children and their families, as may be relayed through constant contact or communication. It is also assumed here that the level of parental engagement across the children is comparable.

If this is not the case, parents may appear more helpful to some children and less to others.

Alternatively, unequal financial transfers may result if parents are motivated to give in exchange for a good or benefit, enjoyed now or later. An example of this would be a parent compensating an adult child for providing home health care.

Under this exchange model, such is not too different from any elderly person purchasing a service good from an external care provider. As such, the quantity purchased will decline as price increases. But how, you ask, could the price of home care provided by your own child increase?

By price, I mean the implicit price of home care as may be determined by the opportunity cost that is borne by the caretaker child.

This is equal to the foregone earnings of this child when she decided to stay at home to care for the parent herself. As it happens, high-income children will face higher opportunity costs of staying home to provide care.

The price or opportunity cost of parental home care therefore change across children of different incomes and situations.

The exchange model predicts that parents are more likely to "purchase" such home care services from a lower-income child than their richer offsprings.

If we generalise the service "home care" to all other services that parents may need or expect from their children, then the exchange model implies that parents will purchase more of such services from their lower-income children than otherwise. This is how parental transfers end up unequal.

Parental generosity - is that more altruism than exchange? I personally think that parents are basically altruistic, and for the most part, parents make financial gifts to their children without expecting any return. However, I also think parents' expectation of getting a benefit or service in return increases as they age. This is not necessarily a bad thing, but just a natural course of life. With longer lives lived and greater health risks associated with age, conditioning parental gifts with some benefits in exchange is perfectly reasonable. The reality is that we are all living longer, and that financing longevity is a real issue for everyone in the family, parents and children alike.

Lastly, why then is there equality post mortem? On this, studies show that in deciding how to divvy up their estate after they have gone, altruistic parents view their children's wellbeing based on what economists call permanent income - the expected long-term average income, rather than on current earnings as they do while still alive. Permanent incomes of children, or their long-term wellbeing, are thus seen by parents as comparable in the long run. I think that is great and very encouraging, especially from the children's point of view. Another interesting explanation relates post-mortem equality to the idea of relative deprivation. Apparently, parents tend to give more equal inheritance when there are just two to three children involved, as the sense of relative deprivation is more easily felt then. This doesn't seem to matter so much in families with a greater number of children.

Dr Rebecca Valenzuela is the author of Economic Development in Asia and is a senior lecturer in economics at Monash University. E: rebecca.valenzuela@monash.edu